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A securities firm barred from the New York Stock Exchange for illegally “flipping” stocks has the right to review by the Securities and Exchange Commission, the 2nd U.S. Circuit Court of Appeals has ruled. Breathing new life into MFS Securities Corp.’s allegations that the stock exchange violated its own rules by terminating the company’s membership without a hearing, the 2nd Circuit also said that pending a favorable review by the SEC, the company still might have a chance to pursue an antitrust claim against the exchange. The ruling in MFS Securities v. New York Stock Exchange, 01-7137, reversed a ruling dismissing the case by Southern District of New York Judge Jed S. Rakoff. In 1998, the stock exchange expelled MFS and two of its floor brokers, Marco and John Savarese, for “flipping” stocks: buying or selling securities for a customer and then buying or selling the same security for a profit of one-eighth a point immediately thereafter. Also known as “trading for eights,” the practice is used to capitalize on the difference between the ask price and the bid price for a particular security while at the same time earning a commission. The MFS floor brokers were also arrested for violating � 11(a) of the Securities Exchange Act of 1934. MFS and the Savarese brothers filed suit alleging that the stock exchange had participated in a group boycott in violation of the Sherman Act, and that the exchange had breached its membership contract with MFS. They claimed that the stock exchange had long been aware that floor brokers flipped stocks, and that it actually benefited from the practice because flipping increased trade volume, and the exchange collects fees from brokers based on total commissions. Judge Rakoff granted the stock exchange’s motion to dismiss on the contract claim, ruling that it and its officers were absolutely immune from suit because of its quasi-governmental nature. The judge dismissed the Sherman Act claim because MFS and the Savarese brothers had failed to charge that anti-competitive effects flowed from the alleged boycott. On the appeal, the 2nd Circuit upheld the judge’s dismissal of the contract claim on the basis of absolute immunity. Addressing the Sherman Act claim, Judge Guido Calabresi said: “MFS’s complaint and its arguments on appeal make clear that the putative lack of process offered by the NYSE and the asserted absence of any SEC review of the termination of MFS’s membership are key to MFS’s Sherman Act allegations.” FAIR PROCEDURE The judge said the Exchange Act requires a fair procedure for “access to services” by members and notice and hearing for any disciplinary action. Moreover, he said, the Exchange Act “provides for SEC review of disciplinary actions taken by the NYSE,” and SEC rulings can be reviewed by a court of appeals. In conducting such a review, Calabresi said the SEC “must consider the effects on competition that the disciplinary action of the Exchange might have had.” “[W]e understand the SEC to have jurisdiction to consider many of the questions embedded in MFS’s complaint and believe that administrative review will be of ‘material aid’ to the district court in resolving the claim brought by MFS,” Calabresi said. “The propriety, under the NYSE rules and the Exchange Act, of MFS’s termination is crucial both to understanding and to identifying, with any degree of specificity, MFS’s antitrust claim.” “Depending on how the SEC rules on these issues, the district court could be deciding whether a procedural deficiency under the Exchange Act in a NYSE membership termination can render a termination a group boycott under the Sherman Act,” he said. On the other hand, the judge said, even if the SEC rules that the process afforded MFS and the Savarese brothers was proper, Judge Rakoff “could face the question of whether a method of termination that complies with the Exchange Act can, nonetheless, give rise to a Sherman Act violation.” Senior Judge Jon O. Newman and Judge Robert D. Sack joined in the opinion. Dominic Amorosa represented MFS. Jay N. Fastow, Marcia Y. Williams and James D. Lawrence of New York-based Weil, Gotshal & Manges represented the New York Stock Exchange.

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